Richard Klitzberg: Wall Street doesn't exist for little guy

May 27, 2012|By Richard Klitzberg

The cratered IPO of Facebook, the largest new issue in ages, illustrates the schism that exists between Wall Street and Main Street.

While Main Street is the user of Facebook, Wall Street is the advisor and banker to the company. In proffering shares in this singular enterprise, the underwriters did all they could to squeeze every last dollar out of anyone even remotely interested in the stock. And that is as it should be, within reason.

In this instance the squeezing, aided by the media frenzy anticipating the IPO, distorted the company's true worth. The post-offering meltdown has shown us that measure of distortion in the pricing.

Part of the underwriting fee Facebook paid (usually 7 percent) was for the expertise and judgment on pricing and sizing of IPOs that is unique to investment bankers.

But what was overlooked in the banker's exuberance to make history was the fact that those who were in on the deal were institutions and other big Wall Street players, meaning those investing other people's money; the little guy was nowhere to be seen.

In not being invited to the table, the little guy avoided the debacle. This time, the little guy won. If he chooses he can buy the stock from the big guys, now selling, who over-valued the offering.

The enduring lesson in the Facebook IPO is that Wall Street does not exist for the little guy. Nor should we forget that "caveat emptor" is the rule that guides even big money movers in their Wall Street dealings.

No, the lesson in all this is that Wall Street serves Wall Street, and everyone else is so much chopped liver.

Richard Klitzberg is president of a company that advises managers of hedge funds and Private Equity.